Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 13 April 2017

Henry Farrell on economists and austerity

Henry Farrell has an article in the Washington Post that links a forthcoming paper by him and John Quiggin with a debate that several bloggers have been involved in over the role of academic economists in promoting (or otherwise) austerity. The paper is very rich in historical detail, but the line he takes in the article is that politicians went with fiscal expansion when economists appeared united in their advice, but the switch to austerity began when economists appeared more divided.

I tend to agree with Kevin Drum in this: he says that basically politicians did what they wanted to do, and economists were simply used to provide some kind of cover for politicians’ decisions. This is the argument I make in my General Theory of Austerity paper. The clearest case of this is probably the UK. George Osborne opposed the fiscal stimulus in 2009, and what changed is that he became Chancellor in 2010. So in this case there was no change of view, just a change in who was in power.

The example which fits Farrell’s case much better is Germany. He argues that German politicians were persuaded to conduct stimulus in 2009 by the (surprising) unanimity of their own economists, but switched to austerity when German economists reverted to type. On this he may be right. But even here I think you can tell a different story, which stresses what politicians were most afraid of. In 2009 they were (rightly) concerned that we might be seeing another Great Depression, and so their instinct was to follow their economic advisors who had exactly the same fear. By 2010 it appeared that this fear had been averted, and now a new concern (for both politicians and austerity inclined German economists) arose over European debt.

In the case of Germany, therefore, the story is one of ‘events, dear boy, events’. In the US and UK it was that Republicans and Conservatives gained enough power to enact the policy they wanted to implement all along. The policy was what I call deficit deceit: reducing the state using fears about the deficit as a pretext. You could perhaps argue that the Treasury and the Governor of the Bank encouraged George Osborne, but I think he would have done it anyway: he was never one to let economics get in the way of achieving a political goal.

But as Drum says, it is not all gloom for economists. To quote: “If we had responded to the 2007-08 financial crisis the same way we did to the 1929-32 financial crisis, we'd still be waiting for a rerun of World War II to pull us back to normal.” I get very annoyed when people ask me what economists have done to deserve respect over the last decade. We avoided another Great Depression, that’s all. It may have been politicians top priority, but we told them what needed to be done, as Farrell makes clear.

But when Farrell suggests that austerity could have been avoided if only economists had stayed united, I think he is wrong. If you view 2016 as an experiment to see if policy can really ignore the united view of academic economists, the result is that it can. While it is important to hammer home what a mistake austerity was, and that it was never the policy recommendation of the majority of economists, the key question is why on occasion that often overwhelming majority can be so easily ignored on issues economists know more about than anyone else.           

13 comments:

  1. Until the 2008 'crisis' is seen as the result of the previous decade's economic behaviour we won't get anywhere.

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  2. " ..austerity was, and that it was never the policy recommendation of the majority of economists"

    It's impossible to tell from your writing whether you can't see the obvious point being made repeatedly to you or you won't regarding this mistake. Politicians were able to impose austerity policies BECAUSE so much of mainstream economic advice 'foamed the runway' for it. Your continual attempts to parse this fact away are becoming embarrassing.

    Correct that problem before bleating once again about how awful the press treatment of mainstream macroeconomists is or how dogmatic politicians are when selecting from the palette of policy advice or even how dim we the public are when failing to give you as much consideration and respect as you think you deserve.

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    1. How did we 'foam the runway'?

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    2. There does seem to be a serious problem with your position. I've tried to draw your attention to this link before. Apparently, the austerity recommenders were a minority but they were "the cream of the British economics establishment" and their opponents were a majority but were really only pro-mild austerity rather than anti-austerity anyway.

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    3. Remember the high-profile letter of February 2010 from leading economists in the Sunday Times which was echoed and re-echoed across the media?
      http://news.bbc.co.uk/1/hi/8514767.stm

      As Skidelsky reminds us;
      https://www.project-syndicate.org/blog/unrepentant-economists-by-robert-skidelsky

      And upon which you have commented before;
      https://mainlymacro.blogspot.co.uk/2016/03/austerity-and-mainstream-for-record.html

      Of course you remember it but even you noticed;
      ” So why is this letter remembered, but the responses to it are not”

      And that’s because it was the tip of the sword, the culmination of a long-term and continuous push that was ineffectively countered. The perception of one push-back letter was swamped by the continuous deluge of pro-austerity news. The political and general perception had been firmly fixed by February 2010 after years of ‘deficit reduction’, ‘household finances analogy’ and ‘living beyond our means’ rhetoric, supported by economists. No piece was complete without the quoted economist pronouncing doom unless ‘sails are trimmed’. More than half of ALL contributions to these news reports were made by economists from the financial markets. This neoliberal framing was captured for precisely this period by analysing news articles;

      http://speri.dept.shef.ac.uk/wp-content/uploads/2015/12/brief18-neoliberalism-austerity-and-the-UK-media.pdf

      And here for particular segments of the news;

      http://journals.sagepub.com/doi/abs/10.1177/0163443715620931

      And since 2010 here;

      http://www.truth-out.org/opinion/item/17209-the-british-media-cheerleaders-for-austerity

      And Krugman describes it in Chapter 2 of this piece;

      https://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion

      But if you want some specifics, here’s the Grauniad in 2007 with the headline ‘Britain plagued by worst deficit since 1697’;

      https://www.theguardian.com/business/2007/feb/10/politics.economicpolicy

      Or this;

      http://www.telegraph.co.uk/comment/columnists/iainmartin/4295219/Gordon-Brown-brings-Britain-to-the-edge-of-bankruptcy.html

      Or who can forget the cherry on top of the cake, Reinhardt and Rogoff;

      https://blogs.wsj.com/economics/2010/01/04/reinhart-and-rogoff-higher-debt-may-stunt-economic-growth/

      Or this;

      http://www.res.org.uk/view/article5Oct12Feature.html

      The whole of Day 2 of the Tory conference in Manchester in 2009 was devoted to deficit reduction strategies and the talking-heads economists who supported them;

      http://www.channel4.com/news/articles/uk/conservative%20conference%202009/3372097.html

      And we received regular pressure from the austerity-hungry EU, of course;

      https://www.euractiv.com/section/uk-europe/news/uk-given-until-2007-to-bring-public-deficit-below-3-ceiling/

      All of which guff resulted in this policy paper;
      https://www.gov.uk/government/publications/2010-to-2015-government-policy-deficit-reduction

      http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/the-public-finances/the-economic-recovery-and-the-deficit/

      You may argue ‘that wasn’t me!’ or ‘honourable exceptions existed’ and I would of course acknowledge the truth of those statements while at the same time pointing out that this heterodox position was as effective as a fart in the wind against the typhoon which policy-makers were riding that was supplied by the constant thermals every think-tank and every commentator and every paid-for economist in the centre and right was supplying. It may be true that they were on theoretically wobbly ground but that did not stop them dominating the airwaves. And neither did the force or scale of your counter arguments.

      If the best-considered and most high profile response to Osborne’s austerity campaign at the time was Labour’s ‘austerity and a balanced budget but not quite so quickly’ official line then even you must accept the reality of my original point;

      ‘Politicians were able to impose austerity policies BECAUSE so much of mainstream economic advice 'foamed the runway' for it.’

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  3. The problem with the 'we saved the economy' argument often used to support flooding the financial markets with £s in the immediate aftermath of the crisis is that the banks could and should have been hung out to dry and a depression could still have been avoided with the added bonus of a slimmer and more financial sector at the end of the day, most obviously in the US.

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    1. Who would have financed firms?

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    2. That could have been financed by spending money. Whether it was a Republican Congress or Labour under Brown, there's no reason to presume those people who all have to stand for re-election would have frustrated spending plans so they could see double digit unemployment. Just look how enough Republicans quickly caved on 'reform' of Obamacare when they thought about their chances of retaining their seats if they followed Trump's/Ryan's directives.

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    3. Just noticed 'firms' (perils of blogging on a mobile) in your reply. The FDIC would have been able to keep the payments system going pending bank restructuring etc.

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    4. The banks should have been allowed to go into administration, the share and bond holders should have lost their shirts (capitalism's creative destruction), then the government should have it bought it from the administrators (for £1), without obligations to share and bond holders. Instead the give threw money at the banks and subverted capitalism.

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  4. I suggest you contact the Washington Post and offer your own op-ed. Obviously, in the US, Paul Krugman does his best, making similar points as yours, but his is a rare voice. The Post economics columnist, Robert Samuelson, appears to be reasonably conservative, according to my non-economics professional viewpoint.

    The Post editorial page favored stimulus, but it also seems to take for granted the line on government expenditures "adding to the deficit" without raising the issue of one way to reduce deficits is to tax the wealthy more, rather than less.

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  5. This is a memory from way back to the late 1980, do it's not going to be that accurate, but the sense of what was said is correct. It's from an interview given by Alan Budd as part of an Open University education course. Essentially he was asked about his role in advising the Conservative government, particularly with respect to Monetary policy. Amongst others he said, I do not believe the Government believed in it, but following its policies meant they would achieve their political policies. Anecdotal, for sure, however it does seem to fit much modern evidence.

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  6. Not found when trying to post on fb

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